Chinese bank profits expected to have surged in first half as economic rebound eased the burden of bad loan provisions

Analysts expect Chinese lenders to post an average 23 per cent profit growth for the second quarter, which would help lift first-half growth
State-owned commercial banks including Bank of China and China Construction Bank are scheduled to report their first-half earnings on Friday and Monday

Banking & finance

Georgina Lee

Published: 5:00pm, 25 Aug 2021

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Chinese banks’ profits are expected to have grown by an average of 23 per cent in the second quarter from a year ago, as sustained economic growth eased the burden of bad loans that had been weighing on their earnings.

The three months to June 30 may prove to be the fastest-growing quarter of this year, said analysts, thanks mainly to a rebound from a pandemic-ravaged second quarter of 2020 which saw the largest profit pullback since the global financial crisis. Improving demand for loans would also help lift growth, they said.

Leading state-owned commercial banks including Bank of China, China Construction Bank, Agricultural Bank of China, and Postal Savings Bank of China are scheduled to report their first-half earnings on Friday and next Monday.

For the sector as a whole, net profit in the first half increased 11.1 per cent from the same period a year ago, according to data from the China Banking and Insurance Regulatory Commission released early this month. That compares to a profit decline of 9.4 per cent during the first half of 2020.

“For the several banks that have already reported their first-half earnings, overall loan growth has kept up with the strong momentum we saw in 2020,” said Chen Shujin, an analyst at Jefferies. “The improvement was also driven by better asset quality.”

A few Chinese lenders reported their first half results earlier in August. Ping An Bank, for example, reported a 28.5 per cent rise in profit.

Helped by an improving economic outlook – China’s first half GDP grew 12.7 per cent from a year ago – banks are likely to report lower provisions for bad loans, thereby boosting their profit. Beijing has set a growth target of “above 6 per cent” for 2021.

The non-performing loan ratio for the banking sector declined for a third straight quarter, to 1.76 per cent at the end of June from 1.8 per cent at the end of the first quarter, according to data released by the banking regulator earlier this month.

Banks are also likely to have seen a recovery in demand for both corporate and retail loans in the second half, bolstered by the vaccine roll-out in China and expectations of a relaxation of border controls, said Cindy Wang, an analyst at DBS based in Hong Kong.

“We are expecting a solid set of results for the first half,” said Wang. “Even going into the second half, Chinese banks’ results would still be better than the second half of last year.”

In the next four months Wang said she expects another round of cuts in the reserve requirement ratio, the amount banks must hold onto rather than lend out. That would release additional liquidity for banks to lend to borrowers. In July, the People’s Bank of China (PBOC) cut the ratio by 50 basis points, releasing 1 trillion yuan into the economy.

A cut in the reserve requirement ratios would also help banks repay some of the maturing medium-term lending facility extended to them by the central bank, which would be a boon to their interest costs. The last cut in July has helped banks lower their funding costs by 13 billion yuan (US$2 billion) per year, the PBOC said in July.

“Chinese banks will continue to get support from the central bank in the form of reserve requirement cut this year, which will also be supportive to the real economy,” said Wang.

This article appeared in the South China Morning Post print edition as: Mainland lenders set for 23pc profit surge